# Consider a simple economy that produces two goods: pens and erasers. The following table shows...

## Question:

Consider a simple economy that produces two goods: pens and erasers. The following table shows the prices and quantities of the goods over a three year period.

Pens Erasers
Year Price (Dollars per pen) Quantity (Number of pens) Price (Dollars per eraser) Quantity Number of erasers
2014 1 120 1 195
2015 2 130 4 195
2016 4 130 4 145

Use the information from the preceding table to fit in the following table.

Nominl GDP Dollars Real GDP Base year 2014 dollars GDP Deflator
Year
2014
2015
2016

From 2015 to 2016, nominal GDP _____ and real GDP _____

The inflation rate in 2016 was _____.

Why is real GDP a more accurate measure of an economy's production than nominal GDP?

a. Real GDP does not include the value of intermediate goods and services, but nominal GDP does.

b. Real GDP is not influenced by price changes, but nominal GDP is.

c. Real GDP includes the value of exports, but nominal GDP does not.

## Gross domestic product.

This the value of all end products and services produced within a given economy during a specified period of time and this value is measured in monetary terms. Gross domestic product can be measured in nominal or in real terms.

To find the nominal GDP, find the total expenditure in each year.

Total expenditure in 2014.

(1*120) + (1*195) = 315

Total expenditure in 2015.

(2*130) + (4*195) = 1,040

Total expenditure in 2016.

(4*130) + (4*145) = 1,100

To find the real GDP, use 2014 as the base year.

Real GDP in 2014.

315 - 0 = 315

Real GDP in 2015.

1,040 - 315 = 725

Real GDP in 2016.

1,100 - 315 = 785

To find the GDP deflator of each year, the following method can be used.

GDP deflator = (Nominal GDP/Real GDP)*100

GDP defletor in 2014 = (315/315)*100

= 100

GDP deflator in 2015 = (1,040/725)*100

= 143.45

GDP deflator in 2015 = (1,100/785)*100

= 140.13

The table below shows the nominal GDP, real GDP and GDP deflator in each year.

Year Nominal GDP (dollars) Real GDP Base year 2014 (dollars) GDP Defletor
2014 315 315 100
2015 1,040 725 143.45
2016 1,100 785 140.13

a.) From 2015 to 2016, the nominal GDP decreased from 1,040 to 1,100 while the real GDP increased from 725 to 785

b.) To find the inflation rate in 2016 rhe following formula can be used.

{eq}\ Inflation\ rate\ in\ 2016=\frac{(\ GDP\ deflator\ in\ 2016 - \ GDP\ deflator\ in\ 2015)}{\ GDP\ deflator\ in\ 2015}\times100 {/eq}

= (140.13 - 143.45)/143.45*100

= -2.31%

Real is adjusted for effects of inflation while nominal is not adjusted for the effects of inflation therefore, making real GDP a more accurate reflector of the economy's growth.